Lehman Brothers International Europe, Re

MR JUSTICE RICHARDS: The Joint Administrators of Lehman Brothers International Europe (LBIE) apply for a direction under paragraph 63 of schedule B1 to the Insolvency Act 1986 that they shall “exercise their power so as to cause LBIE to perform its obligations under the settlement agreement in accordance with its terms”.

The settlement agreement is an agreement dated 21 February 2013 between LBIE acting by the Joint Administrators and the trustee appointed in the United States for the liquidation of Lehman Brothers Inc (LBI) under the Securities Investor Protection Act of 1970. The settlement agreement is the result of many months of negotiations between the Joint Administrators, acting for LBIE and in the interests of its creditors and clients and others with proprietary claims, and the trustee for the liquidation of LBI (the trustee) acting for and in the interests of the creditors and clients of LBI.

The agreement resolves massive claims brought by each estate against the other and brings to an end litigation in New York and the likelihood of litigation in London, which would have taken years to complete as well as being a major drain on the resources of the estates and the courts involved.

A few figures illustrate the effect of the agreement. The Joint Administrators have lodged a proprietary claim for cash and securities on behalf of its clients against LBI totalling approximately US$15.1 billion. They have also lodged a customer claim on its own account against LBI for approximately US$8.9 billion. The trustee has determined the former claim in a lower sum, has disallowed direct claims by those clients on whose behalf LBIE had lodged its claim and has rejected the claim of LBIE on its own account as a customer claim but has allowed it in a smaller sum as a general unsecured claim. LBIE has objected to these determinations by the trustee and proceedings were on foot in New York with a view to the ultimate resolution of those issues. For his part, the trustee of LBI has submitted a proof of debt in the administration of LBIE for some £7.86 billion and has made substantial but unquantified proprietary claims for cash and securities. All these claims are resolved by the settlement agreement.

The agreement is subject to a number of conditions of which I shall mention three. First, it requires the approval of the courts having jurisdiction over the liquidation of LBI (that is the US Bankruptcy Court for the Southern District of New York) together with certain further or ancillary orders from that court (the US Court).

Secondly, it requires a settlement agreement between LBI and Lehman Brothers Holdings Incorporated to take effect, a settlement agreement which also required the approval of the US Court. This has the effect of settling very substantial claims between the estates of those two companies.

Thirdly, it requires the direction which the Joint Administrators seek today from this court.

On 16 April 2013, Judge Peck sitting in the US Court approved the settlement agreement and made other orders on which the agreement is conditional.

By the present application, the Joint Administrators are not seeking the approval of this court to the settlement agreement. With the benefit of extensive professional advice and representation and as a result of intensive arm’s length negotiations with the US trustee, they have reached an agreement which they consider to be in the best interests of all those with an interest in the administration of LBIE. In coming to that conclusion they engaged separate teams of advisors, as well as using separate teams within the Joint Administrators’ own firm, to consider the separate and potentially conflicting positions of those with unsecured claims and those with proprietary claims against LBIE and its assets. Having concluded these negotiations and reached their view as to the interests of all those involved, the Joint Administrators have committed LBIE to the settlement agreement in exercise of the Joint Administrators’ statutory powers.

The Joint Administrators do not undertake a personal contractual obligation under the settlement agreement to perform its terms, unlike, as I understand it, the trustee. The purpose of the direction sought by the Joint Administrators is to give assurance to the US trustee that the settlement agreement will be performed in accordance with its terms. The power of the court under paragraph 63 of schedule 1(b) is expressed in very wide terms and I can see no reason why it should not extend to the direction now sought by the Joint Administrators. For the reasons already indicated, a settlement of the claims between the two estates is plainly in the interests of the administration of LBIE.

While the court is not being asked to approve the settlement agreement, it clearly would be relevant to the decision whether to give the proposed direction if the court had concerns as regards the terms of the settlement agreement. Such concerns might arise either on the court’s own account or as a result of representations made by interested persons. I have not myself examined the terms of the settlement agreement to determine my own view of their merits. I am content to accept, as in large part I think did Judge Peck, that the process by which this immensely difficult task has been brought to a conclusion is overwhelmingly likely to have achieved the best outcome available to the parties.

No interested persons have appeared in court today or communicated concerns either to the court or to the Joint Administrators. This application and the hearing today have been notified to interested persons by postings on the Joint Administrators’ website which is the normal and well established method of communication in this administration. The Financial Conduct Authority, which recently succeeded to the relevant regulatory functions and powers of the Financial Services Authority, was given notice of this application but has not exercised its statutory right to appear on the application, nor has it communicated any concerns with regard to the settlement agreement either to the court or to the Joint Administrators.

I accordingly consider that I should give the direction sought by the Joint Administrators. I am very pleased to be able to do so. It is now over 4½ years since the Lehmans companies went into insolvency proceedings on both sides of the Atlantic and elsewhere in the world.

The scale and complexity of the business conducted by the Lehmans Group was such that these insolvency proceedings have been and continue to be among the largest and most difficult insolvency proceedings ever seen. One of the central and most intractable difficulties, which has had a major effect on the ability of the various officer holders to make distributions to clients and creditors, was the dealings between the two principal operations of the group in London and New York. It is those difficulties which are resolved by this settlement agreement.

I would like to endorse the view expressed by Judge Peck when approving the settlement agreement that it represents a truly remarkable achievement. It is right to acknowledge, as did Judge Peck, that this achievement is the result of the determination and good sense of the office holders together with the skill and sheer hard work of their professional advisors. Above all, it very significantly accelerates and improves the prospect of distributions to clients and creditors which is, after all, the purpose of these insolvency proceedings.

Judge Peck also remarked:

“One of the other notable aspects of this is that this is a cross-border problem, one in which no courts communicated with each other. We had no court to court communication. We had no need for coordination at that level. Rather, this is an example of pure negotiation with the avoidance of litigation risk, cost, and uncertainty driving a very creative outcome.”

I would like to say that since he made those remarks and with the strong encouragement of the Joint Administrators and the trustee, Judge Peck and I have conducted a telephone discussion. We did so yesterday and were able to take stock of progress to date and to inform each other of what appear to be the principal outstanding matters in our respective jurisdictions. We agreed that, if appropriate and always with the knowledge of interested parties, we would be willing to have further communications. Whether they would be with or without the presence of other parties would depend upon the circumstances and on the views of those involved.